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Striking a new tone

Last week, a speech by Martin Wheatley, CEO
designate of the Financial Conduct Authority (FCA) – one of two new bodies that
will replace UK regulator the Financial Services Authority from next year – set
the tone for a more intrusive approach.

Wheatley –- known for his tough line on
insider trading during his six-year tenure at the helm of Hong Kong’s
Securities and Futures Commission (SFC) – took to the stand at the Markets and
Clients Assets Conference in London to emphasise that no corner of the
wholesale markets would escape oversight.

Rather than looking to load more rules and
regulations on an already over-burdened financial industry, the tone of
Wheatley’s speech suggested a tougher enforcement of existing rules. The result
is likely to be difficult and probing examinations for financial institutions
that encompass the fair treatment of counterparties, including the establishment
of a level playing field, and the overall conduct of wholesale market
participants.

“You can expect the FCA to be a robust
regulator of financial markets,” he said. “Firms should expect to deal with FCA
in areas that regulators have not historically looked at. This may be in parts
of securities markets where participants have traditionally believed the
regulator will let them get on with it – either because they believe we are not
interested, or because they believe they are big enough and sophisticated
enough to look after themselves.”

This particular comment may have been a nod
towards an impending crackdown on unbundled execution and research costs, after
a recent FSA report found that only a limited number of firms were compliant
with conflict of interest rules.

Wheatley also took aim at regulated
investment exchanges, stating the FCA’s new supervisory powers in this area
would foster a more rapid approach for dealing with those that fall out of line
with market integrity standards that are vital to maintaining consumer
confidence.

“The legislation allows simplified
procedures for directing or removing recognition, powers to require the
appointment of skilled persons and the ability for the FCA to levy financial
penalties and issue public censures,” he said.

Any doubters as to Wheatley’s intent need
only to look at his transformation of the SFC into a no-nonsense enforcer.
Under Wheatley’s leadership, the Hong Kong watchdog secured its first criminal
convictions for insider dealing, including that of Du Jun, a former Morgan
Stanley trader who was sentenced to seven years in prison in 2009. He also
sought to tackle market manipulation that may have been initiated outside of
Hong Kong and led the way with cross-border action, including an attempt to
freeze the assets of New York-based hedge fund Tiger Asia after it was accused
of insider dealing of China Construction Bank shares.

In addition to getting to grips with the
onslaught of post-crisis regulation, financial institutions better be sure they
observe both the spirit and letter of existing laws.